The Home Mortgage Deduction

There’s some consternation in conservative (and other) circles about tax reform proposals that would eliminate the home mortgage interest deduction. The deduction is eliminated in most flat tax proposals, though it is not eliminated in the plan Governor Perry laid out today.

It seems to me that, at least in the abstract, a tax reform measure that lowered rates and eliminated such deductions would be fair. To me all these credits are just a form of social engineering through the tax code. Believe me, I benefit from these credits and so it would probably be against my self interest to see them go. On the other hand, my overall rate would decline, so it wouldn’t be a catastrophic change for me.

At any rate, opponents of eliminating this deduction categorically state that it would depress home sales and force others into bankruptcy. This seems . . . overstated. The deduction certainly had no influence on my decision to buy a home, and even if I lost the deduction without a concurrent rate decrease it would hardly force me out onto the streets. Believe me, I like getting that extra money back, but it isn’t that much money.

Maybe I’m missing something here and the deduction has a much greater influence on people’s decisions to buy or rent than I know. And maybe I’m just one of those “fat cats” Mitt Romney thinks are the ones who would be the sole beneficiaries under Perry’s plan. But I fail to see how this simple credit or deduction is that much of a factor in home buying decisions.

I would love feedback on this one.

7 Responses to The Home Mortgage Deduction

I suspect folks don’t think much about the actual economics involved; all the folks who sell houses insist that it’s a big problem, so they trust that those folks know what they’re talking about.
(Me, I’m not dumb enough to buy property that the county will keep charging me a couple of hundred bucks a year on for eternity, especially not since the local folks decided they can charge retroactive taxes, and charge plots at maximum market value, even if that means it would be subdivided to the max. So we never got to the point of figuring out if we should believe folks who are trying to sell us stuff.)

But I guess that gets to the heart of my question about the issue – leaving the world of abstraction, would there actually be an impact in the housing market, and if so, why when the credit is ultimately not that significant as a percent of overall salary, even for a middle income family?

The economic cost of home ownership increases if interest is not deductible. This depresses demand, which will depress price. It is inevitable.
That said, once pricing stabilizes, it would be good tax policy to phase out mortgage interest deductions over time.

1. Anything increasing the cost of home ownership will have some depressing effect on the demand;

2. Land ownership will be more beneficial for those who can rent out their property because the interest would still be deductible as an operating expense. Seems this would increase the likelihood of fewer people owning the property in which they live. Whether that’s good or bad, I don’t know. Our communities are becoming fairly rootless as it is, my guess is this would only increase the phenomenon (home ownership being a pretty big community root for most people).

The home purchase decision is driven by the monthly payment in relation to available income. The mortgage interest deduction affects that.

Tax policy solely should be implemented to efficiently raising revenues to fund the government’s legitimate needs.

The money you earn (by the Grace of God) is the fruit of your labor and it is your money. Too many people have the belief that it’s the government’s money and the regime allows you to keep more or less or its money based on tax policies like the personal exemption, deductions, credits, the Alternative Minimum Tax, etc.

The personal exemption (PE) is my tax bugaboo. I view it as the gov’s determination of the maximum amount, per taxpayer and per each of his/her dependents, of your fruits of labor that the rulers allow you to keep. If the PE had been indexed (from the 1930’s) to inflation, it would be about $10,000 (I may be exaggerating) per family member. But, that is anathema. It absolutely would place family ahead of the government money needed to finance Obama’s, Pelosi’s and Reid’s re-elections.